China banks take a hit, world watching whether it can pull through financial reforms

Updated: Monday August 19, 2013 MYT 9:20:19 AM

China banks take a hit, world watching whether it can pull through financial reforms

CHINESE banks’ profits are expected to fall in the first half against a negative outlook for the next three years. The nine Hong Kong-listed mainland banks are expected to report about 10% growth in net earnings when they start releasing results this month, according to analysts. Meanwhile, the non-performing loans ratio is expected to rise by 0.93%. Some analysts see an increase in bad loans and interest rate liberalisation as denting mainland banks’ profits, says the South China Morning Post (SCMP). Regulators have asked lenders not to extend new loans to sectors hit by overcapacity, such as steel and cement. “That means companies will struggle in the case of a prolonged economic slowdown and have problems repaying existing loans,” says SCMP.Recent regulatory tightening in the interbank market also resulted in the shrinking of the interbank business, with most of the impact to be seen in the second half of this year.

Interbank rates on the mainland hit historic highs in June, as regulators decided to rein in shadow banking and crack down on the bond market.

Small and medium-sized banks were affected severely because they are the major borrowers in the interbank market, reports the SCMP.

Bank profits will be underpinned by a stable net interest margin (NIM), a key measure of lending profitability, and a recovery in fee income growth driven by credit card and wealth management fees, analysts were quoted as saying.

“The slow move towards deposit interest rate liberalisation will benefit the outlook of NIM,” an analyst with a major mainland investment bank in Beijing was quoted as saying.

The central bank announced the abolition of the floor on loan rates last month, in a small step towards interest rate deregulation.

Market participants are now awaiting the move that would allow the market to determine the interest rate to be paid to depositors, says the SCMP.

It is a sign of the slowing economy in China and the world is watching whether it can pull through all the financial reforms it has on its plate.

Whether it affects the rest of Asia remains to be seen, as China has a certain influence on Asian economies by virtue of being the second-largest economy in the world.

But for a start, they will not be the role models for other Asian banks seeking greater regional expansion.

Their attempts at financial reform appear to be clumsy, hitting major sectors of the economy at the same time.

Good financial reform should be administered smoothly and progressively; things done in a bunched-up manner will have a negative result.

US commodities regulator, the Commodity Futures Trading Commission (CFTC), has subpoenaed several major metals warehousing businesses on complaints that metal prices were higher than what they should be. The international companies that have complained include Coca-Cola and brewer Miller Coors.

Officials are reported to have requested all information linked to trading on the London Metal Exchange since the start of 2010, in what is seen as the potential prelude to a full investigation of the metals market, says The Telegraph.

Over the past three years, competition has intensified from banks such as Goldman Sachs and JP Morgan, as well as commodities traders Glencore Xstrata and Trafigura.

This investigation into metal prices follows an earlier investigation into oil prices, which were suspected to be manipulated.

As commodities trading becomes bigger than its basic needs, this sort of manipulation towards profit-oriented goals will happen.

The problem for the CFTC, which played a major role in getting Barclays to admit to attempts in world interest rate rigging, is to monitor this increasing number of players.

France has warned of possible money laundering in vineyard sales to Chinese investors, says the SCMP.

The annual report of the anti-money-laundering unit of the French Ministry for Economy and Finance, Tracfin, released last month, has also singled out Russian and Ukrainian buyers.

Some of these buyers use “complex judicial arrangements with holding companies located in fiscally privileged countries” to obtain these vineyards, making it difficult to establish the origin and the legality of the funds brought into France, says the SCMP.

Money laundering is usually associated with banks, but this time, it is the purchase of vineyards.

This is something highly unexpected and speaks of the ingenuity of the investors.

Although the report indicates that France, which badly needs the funds in the current economic situation, is not likely to exert pressure on the case, it should at least send out signals that such acts are undesirable.

If left unchecked, it can blow up to be a big thing.

Money laundering is a serious crime in many parts of the world.

As an example, major banks have been fined heftily for laundering money belonging to drug barons and terrorists.

Columnist Yap Leng Kuen would like to see all forms of money laundering being taken seriously.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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